Ringgit set to shine this year

Ringgit chart

PETALING JAYA: The ringgit emerged as Asean’s third-best performing currency in 2020, after it managed to stage a sharp recovery from last year’s weakest level of RM4.45 per US dollar to end the year at RM4.02.

Economists believe that the ringgit’s uptrend would extend into 2021, partly owing to the continued weakening of the world’s reserve currency.

In fact, there are possibilities for the local currency to enter the range of just below RM4 per US dollar by year-end, marking the first time since June 2018.

While economists have cautioned that there may be some pullback in the near term, as evident from the ringgit’s slight depreciation year-to-date, they believe that conditions would likely improve in the second half of the year.

Speaking to StarBiz, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie (pic below) said the ringgit is estimated to end the year at RM3.95 to RM4 per US dollar.

“This would be possible with the expected stronger economic recovery in the second half, supported by the acceleration of the Covid-19 vaccination programme, ” he said.

Meanwhile, AmBank Group chief economist Anthony Dass said the ringgit could average around RM3.98 to RM4.04 per US dollar in 2021.

According to him, apart from the weakening US dollar, other drivers for a stronger ringgit would include stable global crude oil prices, an increase in domestic money supply that would raise expectations for higher interest rates as well as the ringgit’s attractive valuation as it remains largely undervalued.

In addition, an increased capital inflow into the country would also help strengthen the ringgit.

Dass (pic below) explained that there are chances for stronger capital flows into Malaysia, thanks to the widening bond yield spread between Malaysia and the US as well as high liquidity entering into emerging markets like Malaysia in search of promising returns.

However, several downside risks that may affect the ringgit value going forward are political instability, a downgrade by foreign rating agencies as well as the ongoing review of Malaysia’s position in the World Government Bond Index.

Dass cautioned that the ringgit could temporarily face a pullback in the near term, weakening to around RM4.05 to RM4.15 against the US dollar.

“The pullback on the ringgit’s strength could be driven by the current pandemic crisis with rising cases both globally and domestically.

“This resulted in containment measures which raised uncertainty that is likely to persist for two to four months.

“The ringgit could also lose some steam should the overnight policy rate be reduced, and also from the narrowing inflation rate differentials with the US, ” he said.

Year-to-date, the ringgit has declined by about 0.6% against the US dollar. Among other regional currencies that have depreciated in the same period were South Korean won, Japanese yen, Singapore dollar, Indonesian rupiah and the Philippine peso.

SERC’s Lee said the softer ringgit performance in January was largely due to issues revolving Covid-19.

“The ringgit outlook has now been undermined by lingering concerns about the duration and impact of the second round of movement control order on economic recovery, the ongoing state of emergency as well as the Covid-19 development amid the vaccine availability and vaccination programme that would begin in February-March 2021.

“The ringgit is likely to trade at a tight range between RM4 and RM4.05 per US dollar in the near term as investors remain wary about the economic scarring that could hold back the recovery, ” he said.

Meanwhile, AmBank’s Dass said the ringgit’s movement against other key currencies such as the euro, British pound, Japanese yen and Singapore dollar in 2021 will also be influenced by the development of vaccines, Covid-19 cases and the restrictive measures to contain the virus spread.

“The ringgit’s outlook is expected to weaken by 0.5% to 1% against the euro, yen and Singapore dollar.

“Against the British pound, much will depend on the outcome of the UK economy, ” he said.